US Dollar stumbles following Chair Powell's remarks
- Jerome Powell pointed out that the progress on inflation stagnated but that it was on track to the 2% target.
- He also pointed out that monetary policy needs more time to do its job and that a rate hike is highly unlikely.
- Markets are pushing rate cuts to year-end.
The US Dollar Index (DXY) tumbled to 105.45 on Wednesday following the Federal Reserve (Fed) decision to hold rates at 5.25-5.50% and Chair Powell’s cautious comments.
The US economy, despite facing inflationary pressures and a tightening labor market, maintains robust domestic demand as per Powell's observations. While registering progress, inflation remains high, leading to the Fed's cautious stance on its future trajectory. As for now investors are giving up their hopes on three rate cuts this year and are instead delaying the start of the easing cycle to Q4.
Daily digest market movers: DXY drops as markets digest Powell’s comments
- The Federal Reserve (Fed) emphasized that progress on inflation stagnated and that they need more confidence to start cutting.
- During the press conference, Jerome Powell acknowledged significant progress toward the Fed's dual goals, but that inflation is still above target, with further progress uncertain.
- He also presented different case scenarios where he basically stated that if data continues coming strong, they will hold their monetary policy for longer. If data gives the bank more confidence, they will start cutting.
- However, the basically took of the table the posibility of a rate cut.
- Currently, the likelihood of a rate cut by the Fed in June and July is low while those odd for the September meeting dipped below 55%.
DXY technical analysis: DXY is poised for a downward move, despite slight bullish indicators
On the daily chart, the Relative Strength Index (RSI) is on a negative slope even as it remains in positive territory, implying that despite the buying momentum, there is increasing bearish pressure. The Moving Average Convergence Divergence (MACD) showcases flat red bars indicating the possibility of a bearish crossover soon. This signals that the selling force could pick up steam in the coming trading sessions.
Additionally, the DXY's position above its Simple Moving Averages (SMAs) suggests a slightly bullish tone in the short term. Although showing a negative short-term outlook, the fact that it remains above the 20, 100, and 200-day SMAs insinuates the undercurrent of the bull forces that could balance out the bear camp.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.